A New Approach to Marijuana Regulation: In Support of a Potency Tax

JURIST Guest Columnist W. David Ball of Santa Clara School of Law argues that the recent trend of states and cities—most recently in Washington, DC—to pass legislation decriminalizing marijuana is a step in the right direction, but does not go far enough towards elevating the problems and costs of prohibition. Professor Ball instead argues that governments should consider regulating marijuana through a potency tax ...

The District of Columbia recently enacted a bill that decriminalized the possession of up to an ounce of marijuana. The move will undoubtedly address some of the harms of prohibition. Racial disparities in the criminal enforcement of marijuana possession laws are stark throughout the country—particularly in Washington, DC [PDF]. While it is true that most states in the US do not incarcerate someone for mere possession—although not in, say, Louisiana—people are still arrested for marijuana possession with astounding frequency. These arrests can consume officer time; lead to incarceration in a number of other ways—sentencing, failing to make bail, just waiting for the case to be processed—and even amplify criminal behavior. Given that the criminalization of marijuana possession has done little to decrease usage and requires significant law enforcement resources that could be directed elsewhere, decriminalization is a step in the right direction.

My problem with DC's new policy is that it does not go far enough. Decriminalization only addresses some of the harms brought about by marijuana prohibition—those stemming from criminalizing use. It does nothing to address the harms resulting from its production and distribution. Decriminalization does nothing to take criminal cartels out of the market and, more importantly, it does nothing to stop the flow of pot to kids. Regulated drug markets—like those for alcohol and tobacco—draw the line between selling to adults and selling to children. One is legal, while the other is not. Retailers of these drugs have something to lose by selling to kids—their profits from sales and their ability to stay out of prison—whereas drug dealers have little to lose relative to the risks they undertake just to operate. It is still illegal to sell pot to anyone, adults or kids.

We need not choose between a completely unregulated black market and a completely unregulated legal market—one where public health takes a back seat. The rest of this essay will discuss the more nuanced ways in which policies can shift consumption and production of marijuana to minimize effects on public health, with a particular focus on the issue of tetrahydrocannabinol (THC) potency—the active ingredient in marijuana.

The fact that the percentage of THC in marijuana has steadily increased since the 1970s is often cited as a reason not to regulate the market. Opponents of regulation say that because marijuana is more potent, more people will be exposed to its harms. Actually, the issue of potency is one of the best reasons to legalize and regulate the market. There is no safety testing on the black market, no labeling requirement, no guarantees or warranties. Black market buyers have to trust that what sellers say they are buying is, in fact, what they are buying—but buyers cannot regulate their own usage without some idea of the potency of what they are using.

More than that though, potency is a product of prohibition, not a reason to keep it. Drug crimes are charged on the basis of weight, yet consumers—at least those trusting of their dealers' claims—are willing to pay more for more potent marijuana. So—all other things being equal—marijuana suppliers can make more money for the same amount of risk by increasing the potency of their product. Given that the costs of production are the same, the move to more potent strains is entirely rational. In other words, the drive to potency might be a function of the structure of the suppliers' market, not a response to demand.

Aside from labeling, policymakers can address potency through other tools—particularly tax policy. Pigouvian taxation theory describes tax regimes that aim to "internalize"—include within the price—the actual societal costs of a given product—its negative externalities. In other words, if there are social costs incurred by greater THC consumption, then—as we do with our other regulated drugs like tobacco and alcohol—we should tax them accordingly. This will decrease usage—assuming marijuana users are price-sensitive and marijuana is an "elastic" good—as well as provide resources for combating potential harms created by usage. For example, we want cigarettes to be as expensive to individuals as they are to society on average—maybe even a little more—so we can get people to use less of the things that create greater social costs.

Much of my thinking on this subject comes from Towards Liquor Control, a book commissioned at the end of alcohol prohibition by John D. Rockefeller, Jr. Rather than put his head in the sand about a social movement he disagreed with, he instead chose to engage with it in order to ensure that whatever regime ended up replacing prohibition minimized the social costs of alcohol consumption. Full disclosure: I too think marijuana legalization and decriminalization is coming, like it or not, and want to make sure that we minimize the harms of marijuana consumption. The authors of Towards Liquor Control—Raymond Fosdick and Allen Scott—essentially laid out the systems of alcohol regulation we have today: where beer, wine and liquor are subject to different regulatory regimes, with beer being most available and liquor the least. Easier access to beer was meant to soak up the demand for alcohol and prevent people from moving onto the more harmful form of alcohol: liquor. Tax policy reinforces this: beer and liquor are roughly the same price per the amount of alcohol in them, despite differences in the total volume of liquid.

Ideally, we would tax both marijuana and marijuana-derived products—like concentrates or foods—on the basis of THC content. This is problematic in the absence of a standardized method for testing THC content. We all know what THC is and what it is made of, but we do not all agree on how to measure the plant's chemical composition in the same way. We need to standardize the process [PDF]. But this problem should assuredly not encourage us to structure tax policy on the basis of either price or weight. Prices in a legal market will likely plummet—as Jonathan Caulkins has convincingly argued—and weight will merely embed the potency incentives of the black market—the same way charging by volume would equalize the prices of a pint of liquor and a pint of beer, setting aside differences in production costs.

Until there is a uniform testing regime, I would like to suggest an interim solution: requiring sellers to label the amount of THC on products that contain it and taxing them on that basis. This balances the incentives producers have, as low-THC strains would be cheaper but less attractive—at least to some consumers—while high-THC strains would be more expensive yet more attractive. In other words, the incentives to undersell the "real" amount of THC you have in order to avoid taxation would presumably hit producers' revenues an offsetting amount. Producers could thus make rational decisions about what part of the market they want to attract. Some might go for high cost, high potency products; while others might go for lower cost, lower potency products. But there would be no uniform drive toward high potency.

This would encourage differentiation on the basis of factors other than THC content—the same way wine is made for a variety of reasons, not just how wasted it makes you. It is difficult to tell what factors matter in the marijuana market since it is entirely underground, but it might be that a regulated market structured to avoid a THC potency race could result in product differentiation on the basis of taste, methods of production—such as indoor as opposed to outdoor or organic as opposed to conventional—and other factors. Marijuana contains a number of compounds besides THC that have shown promising—if anecdotal—potential to treat a range of diseases, particularly an extreme form of epilepsy known as Dravet's Syndrome. Given the harms of overusing any drug, creating space to compete on something besides potency makes good sense.

All of this is to say that it is time we started having more nuanced discussions about the manner in which we might want to regulate marijuana—assuming one can accept that regulation through an exclusively criminal regime has failed. Legal regulatory regimes can and will take a variety of forms. We must be careful to ensure that we articulate the goals of a new regime so that we can design policies to further those goals. We cannot, for example, simultaneously drive out the black market via lower prices and also raise exorbitant sums in taxes. We have to decide which is more important. Rockefeller himself understood this and noted in the introduction of Toward Liquor Control that he would be willing to trade higher alcohol consumption—via lower prices and taxes—if it meant getting rid of the criminal black market and all of its attendant social ills.

DC has done something about marijuana, but not all it could have done. Decriminalization solves only those problems that come from criminally penalizing marijuana's use. The real missed opportunity here is the opportunity to engage with the marijuana market and structure it in a way that also reduces harms derived from its sale and production. Only a regime that legalizes and regulates production and sales can do that.

W. David Ball is Assistant Professor at Santa Clara University School of Law where he primarily works in the field of criminal law and sentencing and corrections. Before joining the Santa Clara University School of Law faculty in 2009, he served as a Social Justice Teaching Fellow at Santa Clara, as a Stanford Criminal Justice Research Fellow and as a law clerk for the Honorable John T. Noonan, Jr. of the U.S. Court of Appeals for the Ninth Circuit in San Francisco. He received his J.D. from Stanford University and has been published in the Columbia Law Review, the American Journal of Criminal Law, the Stanford Law and Policy Review as well as the Journal of Contemporary Health Law and Policy. The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Santa Clara Law School.

Suggested Citation: W. David Ball, A New Approach to Marijuana Regulation: In Support of a Potency Tax, JURIST - Forum, Apr. 17, 2014, http://jurist.org/forum/2014/04/w-david-ball-marijuana-potency.php

This article was prepared for publication by Kenneth Hall, assistant editor for JURIST's Academic Commentary service. Please direct any questions or comments to him at academiccommentary@jurist.org

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